Patton v. Mid-Continent Casualty

Filing 31

ORDER ADOPTING 27 Memorandum and Recommendations GRANTING 14 MOTION for Judgment on the pleadings. (Signed by Judge Gray H Miller) Parties notified.(rkonieczny, 4)

United States District Court
Southern District of Texas

ENTERED
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
GRIER PATTON AND CAMILLE PATTON,
Plaintiffs,
and
DAVID A. FETTNER
Receiver,
v.
MID-CONTINENT CASUALTY COMPANY,
Defendant.

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July 19, 2016
David J. Bradley, Clerk

CIVIL ACTION H-15-1371

ORDER
Pending before the court is a memorandum and recommendation (“M&R”) entered by the
Magistrate Judge on June 13, 2016. Dkt. 27. The Magistrate Judge recommends that the court grant
defendant Mid-Continent Casualty Company’s (“Mid-Continent”) motion for judgment on the
pleadings (Dkt. 14). Id. Grier and Camille Patton and David Fettner (collectively, “Plaintiffs”) filed
objections to the M&R (Dkt. 28), Mid-Continent filed a response to the objections (Dkt. 29), and
Plaintiffs filed a reply (Dkt. 30). After conducting a de novo review of the pleadings, the motion for
judgment on the pleadings, and responses to that motion, and after considering the M&R, the
objections to the M&R, the response to the objections, and the applicable law, the court is of the
opinion that the Magistrate Judge’s recommendation should be ADOPTED IN FULL.
I. BACKGROUND
This is an insurance coverage case. Mid-Continent issued insurance policies to Black
Diamond Builders, L.L.P. (“Black Diamond”) for the following policy periods: July 7, 2004 through

July 7, 2005 (04-GL-000554256) (“2004 Policy”); July 7, 2005 through July 7, 2006 (04-GL000596014) (“2005 Policy”); July 7, 2006 through July 7, 2007 (04-GL-000638365) (“2006
Policy”); July 7, 2007 through July 7, 2008 (04-GL-000680691) (“2007 Policy”); and July 7, 2008
through July 7, 2009 (04-GL-000722792) (“2008 Policy”). Dkt. 1-3. These policies, which are
substantially similar, covered “sums that [Black Diamond became] obligated to pay as damages
because of ‘bodily injury’ or ‘property damage’ to which” the policies applied. Dkt. 10, Ex. 1
§ 1(1)(a) (coverage section of the commercial general liability coverage form in the 2004 Policy).
“Bodily injury” is defined as “bodily injury, sickness or disease sustained by a person, including
death resulting from any of these at any time.” Id. § 5 (Definitions). “Property damage” is defined
as follows:
a. Physical injury to tangible property, including all resulting loss of
use of that property. All such loss of use shall be deemed to occur at
the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All
such loss of use shall be deemed to occur at the time of the
“occurrence” that caused it.
Id. “Occurrence” is defined as “an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.” Id.
The policies applied only to “bodily injur[ies]” or “property damage” if the injuries or
damage was caused by an “occurrence” taking place in the “coverage territory,” and generally within
the policy period. See id. § 1(1)(b). The “coverage territory” means the United States, Puerto Rico,
and Canada as well as international waters, international airspace, and other parts of the world under
certain conditions. Id. § 5(4). The policies contained an exclusion for property damage occurring
on a “particular part of real property on which [Black Diamond] or any contractors or subcontractors
working directly or indirectly on [Black Diamond’s] behalf [were] performing operations, if the
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‘property damage’ [arose] out of those operations.” Id. at MCC 000051 (Residential Contractor
Extension A Endorsement). They also contain an exclusion for “‘Property damage’ to ‘your work’
arising out of it and included in the ‘products-completed operations hazard.’” Id. at MCC 000030
(Exclusion - Damage to Work Performed By Subcontrators on Your Behalf Endorsement CG 22 94
10 01). “Your work” is defined in the policies as follows:
“Your work”:
a.
Means:
(1) Work or operations performed by you or on your behalf;
and
(2) Materials, parts or equipment furnished in connection with
such work or operations.
b.
Includes
(1) Warranties or representations made at any time with
respect to the fitness, quality, durability, performance or use of ‘your
work’, and
(2) The providing of or failure to provide warnings or
instructions.
Id. § 5(22). “Products-completed operations hazard” is defined as follows:
“Products-completed operations hazard”:
a.
Includes all “bodily injury” and “property damage” occurring
away from premises you own or rent and arising out of “your
product” or “your work” except:
(1) Products that are still in your physical possession; or
(2) Work that has not yet been completed or abandoned.
However, “your work” will be deemed completed at the earliest of the
following times:
(a) When all of the work called for in your contract has
been completed.
(b) When all of the work to be done at the job site has
been completed if your contract calls for work at more than one job
site.
(c) When that part of the work done at a job site has
been put to its intended use by any person or organization other than
another contractor or subcontractor working on the same project.
Work that may need service, maintenance, correction, repair or
replacement, but which is otherwise complete, will be treated as
completed.
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Id. § 5(16).
The Pattons initiated an arbitration claim against Black Diamond in December 2010. Dkt. 17, Ex. F, Ex. 1. Black Diamond was the builder or general contractor of the Pattons’ house. Id. The
Pattons alleged that their house was damaged due to significant differential movement of the
foundation of the house. Id. Black Diamond conceded that the house was damaged but disagreed
regarding the method and cost of repair. Id. On October 21, 2014, the arbitrator found that both
design and construction errors led to the damage to the residence and that Black Diamond’s “failure
to build the house slab/foundation to the elevation shown on the plans” prevented drainage away
from the structure. Id. The arbitrator awarded the Pattons $2,935,944.00 in damages plus $4,962.50
for arbitration fees and expenses. Id. Black Diamond did not pay. The Pattons filed an action in
the 55th Judicial District of Harris County to confirm and enforce the arbitration award. Dkt. 1-7,
Ex. F. On January 12, 2015, the state district court judge issued a judgment affirming the award and
additionally assessed five-percent post-judgment interest commencing thirty days after the judgment.
Id.
The Pattons were unable to collect on the judgment and sought assistance from the court that
confirmed the arbitration award. Dkt. 1-7, Ex. G (Order for Turnover Relief and Appointment of
Receiver). The court found that the Pattons had “made a good faith effort to collect the Judgment
but were unsuccessful prior to filing the Application For Turnover After Judgment And For
Appointment of Receiver” and that “the nature of the asset pursuit in satisfaction of Judgment has
necessitated the appointment of a Receiver to facilitate the collection of the Judgment to which [the
Pattons were] legally entitled.” Id. The court specifically noted that Black Diamond owned the
insurance policies at issue in this lawsuit. Id. The court appointed David A. Fettner as the receiver.
Id.
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Plaintiffs attempted to collect the judgment from Mid-Continent, which they contend is
obligated under the policies to pay the judgment. Dkt. 1-3. Mid-Continent disclaimed liability and
refused to pay. Id. On April 13, 2015, Plaintiffs filed an original petition in the 269th District Court
in Harris County, Texas, against Mid-Continent, to collect the judgment. Id. In the petition,
Plaintiffs assert the following claims against Mid-Continent: bad faith and unreasonable denial of
coverage, breach of contract, and violations of the Texas Deceptive Trade Practices Act and the
Texas Insurance Code. Id. Plaintiffs contend that the “injury to [their] property includes damage
to property which is not the work of Black Diamond, and neither are the damages subject to any
other policy exceptions or exclusions.” Id. Mid-Continent filed a general denial on May 15, 2015.
Dkt. 1-9.
Mid-Continent removed the case to this court on May 21, 2015. Dkt. 1. The court referred
the case to the Magistrate Judge for full pretrial management on June 18, 2015. Dkt. 7. MidContinent filed an amended answer on June 24, 2015, in which it asserts various affirmative
defenses, including the defense that the Pattons’ losses fall within the “your work” exclusion.
Dkt. 10. Mid-Continent filed a motion for judgment on the pleadings on September 22, 2015.
Dkt. 14. The Magistrate Judge issued her M&R regarding the motion on June 13, 2016. Dkt. 27.
She recommends that the court grant the motion for judgment on the pleadings because the
arbitrator’s award establishes that the damages awarded were excluded under the policies. Id.
Plaintiffs timely filed objections to the M&R. Dkt. 28. Mid-Continent has responded to the
objections, and Plaintiffs have replied. Dkts. 29, 30.
II. LEGAL STANDARD
For dispositive matters, the court “determine(s) de novo any part of the magistrate judge’s
disposition that has been properly objected to.” See Fed. R. Civ. P. 72(b)(3). “The district judge may
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accept, reject, or modify the recommended disposition; receive further evidence; or return the matter
to the magistrate judge with instructions.” Id. “When no timely objection is filed, the court need
only satisfy itself that there is no clear error on the face of the record in order to accept the
recommendation.” Fed. R. Civ. P. 72(b), Advisory Comm. Note (1983). For nondispositive matters,
the court may set aside the magistrate judge’s order only to the extent that it is “clearly erroneous or
contrary to law.” Fed. R. Civ. P. 72(a).
III. OBJECTIONS
Plaintiffs assert the following objections to the Magistrate Judge’s M&R: (1) the Magistrate
Judge misapplied or misconstrued case law in reaching her conclusion, specifically Wilshire
Insurance Co. and Feaster; (2) the Magistrate Judge assumed facts not in evidence because she
“assumed that independent contractors independently hired and paid directly by the Plaintiffs, as site
owners, for whom the work was performed, but then damaged by the general contractor . . ., were
subcontractors to the general contractor for Plaintiffs’ home construction, or that their work was
performed for the benefit of that general contractor; (3) the Magistrate Judge treated the motion for
judgment on the pleadings as a motion for summary judgment “upon proof of the matter in
controversy” even though it is not an evidentiary proceeding; (4) the Magistrate Judge “mistakenly
observed that ‘Black Diamond was the homebuilder/general contractor (not just the foundation
repairer) whose work was the entire house (not just the foundation)’” when there was “absolutely
no such language in the Arbitration Award”; (5) the Magistrate Judge incorrectly determined that
the arbitrator omitted discussion of specific damage to work of others when the arbitrator awarded
a collective amount including damages to the work of others; and (6) the Magistrate Judge
wrongfully accepted the allegations in the defendant’s motion as true. Dkt. 28. The court will

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address objections (1), (4), and (5) together, since they are intertwined, and then it will discuss
objections (2), (3), and (6) separately.
A.

Objections (1), (4), and (5)
Objections (1), (4), and (5) all center around whether the Magistrate Judge’s reasoning

relating to the contents of the arbitration award and the “your work” exclusion in the insurance
policies is correct. Mid-Continent agrees with the Magistrate Judge’s determination that the
damages awarded by the arbitrator are excluded under the “your work” exclusion, arguing that the
arbitration award was “for only the house and nothing else.” Dkt. 29 at 2. It points out that the
arbitrator specifically stated that the award was for damage to the residence caused by foundation
issues and that those responsible for the pool were not part of the arbitration. Id. at 3. Plaintiffs
concede that “the damage to the pool, constructed by an independent third-party contractor[,] was
not within the contemplation of the award [and] was specifically excluded.” Dkt. 30 at 2. However,
they state the opposite in the next paragraph, in which they indicate that the arbitrator did not
segregate damages to the pool and house structure (implying that the pool is included in the award)
and that it is up to this court to determine the amount of the award that should be allocated to the
general contractor’s damage to the work of others. Id. at 4. While it is unclear exactly what
Plaintiffs are arguing, an examination of the arbitration award clarifies that the arbitrator was not
considering the cost of repairs to the pool.
The arbitrator specifically noted that other “design and contracting entities were involved in
the building of the residence and pool in question” but they “were involved in companion litigation”
and were not involved in the arbitration. Dkt. 1-7, Ex. F, Ex. 1. The arbitrator acknowledged that
Black Diamond’s “actions seriously affected the work of other contractors on the project (including
both subcontractors of [Black Diamond], and the separate contractors hired by [the Pattons]).” Id.
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However, in discussing the damages he considered, the arbitrator did not discuss the pool at all. He
discussed only lifting the house. See Dkt. 25-1 at 2. He then determined that the costs to “repair the
house were more than the market value of the home” and decided to calculate damage based on the
unrepaired value of the home less the value of the underlying land. Id. (emphasis added). The fact
that he does not discuss the cost or method of repairing the pool at all and specifically states that the
pool was being considered in companion litigation makes it clear that the award was for the damage
to the house only.
An examination of the cases that Plaintiffs contend the Magistrate Judge misapplied or
misconstrued does not change the outcome. In Wilshire Insurance, the insurer argued that the “your
work” exclusion precluded coverage. Wilshire Ins. Co. v. RJT Constr., LLC, 581 F.3d 222, 226 (5th
Cir. 2009). The complaint alleged that the insured, a foundation repair subcontractor, worked on the
foundation, which was faulty, but not on the walls and ceiling of the house. Id. at 227 & n.16. The
court noted that the “your work” exclusion did not “preclude coverage for damage to the parts of the
house resulting from the allegedly faulty foundation” and ruled that the insurer had a duty to defend.
Id. In Feaster, the insured was a homebuilder. Feaster v. Mid-Continent Cas. Co., No. 13-cv-3220,
2015 WL 164041, at *1 (S.D. Tex. Jan. 13, 2015) (Hoyt, J.). The insured’s tiles and walls were
cracking and there were defects in the sheet rock, brick mortar, and woodwork. Id. The insurer
refused to defend the homebuilder under the “your work” exclusion. Id. at *1-2. The state court
entered a default judgment finding that the homebuilder’s negligent work and supervision
proximately caused the damages. Id. at *2. Like in this case, the homeowners were unsuccessful
collecting the judgment and obtained a turnover order that named Fettner as receiver. Id. The
homeowners and Fettner sued the insurer. Id. The case was removed to federal district court, and

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the judge granted summary judgment in favor of the insured under the “your work” exclusion. Id.
at *5-6.
Here, Plaintiffs contend that the damage to the pool that resulted from Black Diamond’s
work, like the walls and ceilings in Willshire Insurance, is not subject to the “your work” exclusion
and that this case should proceed so that the court can determine what portion of the arbitrator’s
award is for the damage to the pool. However, since the award does not include the damage to the
pool, it is inconsequential that the “your work” exclusion does not apply to damage to the pool.
B.

Objection (2)
Plaintiffs contend that the Magistrate Judge assumed facts not in evidence because she

assumed any other contractors were subcontractors of Black Diamond. Dkt. 28 at 5. Plaintiffs point
out that the arbitration award specifically states that other design and contracting entities were
involved in the building of the residence and pool. Id. (citing the award). It is unclear why Plaintiffs
believe the Magistrate Judge assumed this, but it is inconsequential because the “your work”
exclusion applies to the damages awarded by the arbitrator, which do not include damages to the
pool or work performed by other contractors.
C.

Objection (3)
Plaintiffs’ third objection is that the Magistrate Judge treated this motion as a motion for

summary judgment and looked at the documents attached to the pleadings as evidence. Id. at 6–7.
Plaintiffs note that they should not have been required to muster evidence at this stage. Id. at 7. The
court agrees that a motion for judgment on the pleadings relates only to the pleadings and not
evidence. See Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937 (2009) (setting forth the standards
for evaluating a motion under Federal Rule of Civil Procedure 12(b)(6)); Chauvin v. State Farm Fire
& Cas. Co., 495 F.3d 232, 237 (5th Cir. 2007) (noting that the same standards govern both motions
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to dismiss on the pleadings (Rule 12(c)) and motions to dismiss for failure to state a claim (Rule
12(b)(6))). However, the Magistrate Judge neither relied upon nor required extrinsic evidence to
reach her conclusions. Instead, she considered only the pleadings, which include the policies at
issue, and the underlying judgment. These documents make clear that no evidence will enable
Plaintiffs to establish that Mid-Continent is liable for the damages contained in the arbitration award.
D.

Objection (6)
Plaintiffs’ final objection is that the Magistrate Judge wrongfully accepted the allegations in

the defendant’s motion as true. Dkt. 28 at 9–10. They point out that the M&R includes language
about what the arbitration award “reflects,” which they contend is an improper inference in favor of
the defendant. Id. at 10. The court disagrees. The arbitration award speaks for itself. Construing
it to read that the damages awarded include damages to the pool is not a plausible construction. See
Iqbal, 556 U.S. at 678 (requiring a complaint to contain sufficient factual matter that, accepted as
true, states a claim that is “plausible on its face”).
IV. CONCLUSION
Plaintiffs objections are OVERRULED. The M&R (Dkt. 27) is ADOPTED IN FULL. MidContinent’s motion for judgment on the pleadings (Dkt. 14) is GRANTED, and the Pattons’ claims
are DISMISSED WITH PREJUDICE. A final judgment will be issued concurrently with this order.
Signed at Houston, Texas on July 19, 2016.

___________________________________
Gray H. Miller
United States District Judge

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